As the deep-water-drilling moratorium is about to end, I decided that it was an opportune time to analyze the major companies in the offshore drilling sector. This article presents the relative analysis results conducted for 7 major drillers namely Diamond Offshore (DO), Noble Corporation (NE), Atwood Oceanics (ATW), Transocean (RIG), Ensco (ESV), Pride International (PDE), and Rowan Companies (RDC).
The financial and fundamental information for the companies mentioned above are shown in table that follows:
Company Fundamentals and Financials
DO | NE | ATW | RIG | ESV | PDE | RDC | |
Market Cap | $9.00 | $8.52 | $1.93 | $19.89 | $6.39 | $5.20 | $3.41 |
TTM Sales | $3.48 | $3.40 | $0.62 | $10.66 | $1.77 | $1.42 | $1.72 |
Dividend Yield | 5.1% | 0.37% | - | - | 3.15% | - | - |
Operating Margin (TTM) | 49% | 50% | 49% | 35% | 40% | 19% | 26% |
Return on Equity (TTM) | 32% | 21% | 20% | 14% | 11% | 5% | 9% |
Return on Assets (TTM) | 18% | 17% | 15% | 8% | 9% | 3% | 6% |
Historical EPS Growth | 177% | 64% | 96% | 71% | 51% | 57% | 67% |
LT EPS Growth | 9% | 10% | 15% | 11% | 14% | 17% | 7% |
LT Debt to Cap | 38% | 11% | 21% | 50% | 5% | 27% | 25% |
Current Ratio | 2.95 | 3.44 | 2.87 | 1.39 | 4.02 | 2.07 | 3.11 |
Fleet Size* | 46 | 71 | 11 | 141 | 50 | 25 | 31 |
% Utilization* | 76% | 72% | 46% | 66% | 70% | 64% | 48% |
*- Courtesy www.rigzone.com, Market Cap and Sales in Billions
Relative valuation was performed by 3 different methods.
1) Relative valuation based on historical ratios of the company alone
2) Relative valuation based on historical ratios of the company and its peers
3) Relative valuation based on historical ratios of the company and S&P 500
It should be noted that the data from the last 5 financial years was taken in calculating the estimates used in this analysis. Adjustments were made to account for outliers present in the dataset.
The 2010 EPS and revenue estimates, and the existing book value for the seven companies are shown the table that follows:
DO | NE | ATW | RIG | ESV | PDE | RDC | |
2010 EPS | $6.92 | $4.06 | $3.9 | $7.52 | $3.6 | $1.58 | $2.53 |
2010 Sales/Share | $24.24 | $12.15 | $10.05 | $32.16 | $11.75 | $8.37 | $15.79 |
Book Value (MRQ) | $28 | $30 | $21 | $41 | $38 | $25 | $29 |
Relative valuation based on historical ratios of the company alone
In this analysis, the current P/E, P/S and P/B ratios were compared to the historical ratios of the individual companies over the past 5 years and an estimate for the respective ratios was obtained. Fair value was calculated by applying these estimates to 2010 EPS, sales per share and book value.
RV Based on Historical Ratios of Company Alone
DO | NE | ATW | RIG | ESV | PDE | RDC | |
P/E | |||||||
Current | 8.02 | 6.01 | 8.06 | 7.23 | 10.56 | 26.9 | 11.54 |
Estimate | 10.63 | 9.24 | 10.56 | 7.37 | 7.40 | 13.12 | 8.02 |
Fair Value | $74 | $38 | $41 | $55 | $27 | $21 | $20 |
P/S | |||||||
Current | 2.6 | 2.5 | 3.1 | 1.9 | 3.6 | 3.7 | 2.0 |
Estimate | 3.8 | 3.7 | 3.8 | 2.9 | 3.2 | 2.4 | 1.7 |
Fair Value | $93 | $45 | $38 | $91 | $38 | $20 | $27 |
P/B | |||||||
Current | 2.46 | 1.17 | 1.48 | 1.58 | 1.18 | 1.20 | 1.03 |
Estimate | 3.56 | 2.29 | 2.39 | 2.52 | 1.78 | 1.29 | 1.32 |
Fair Value | $100 | $68 | $50 | $104 | $68 | $32 | $39 |
Avg FV | $89 | $50 | $43 | $83 | $44 | $24 | $29 |
Relative valuation based on historical ratios of the company and peers
In this analysis, the current P/E, P/S and P/B ratios were compared to the peer companies and an estimate for the respective ratios was obtained. Fair value was calculated by applying these estimates to 2010 EPS, sales per share and book value.
RV Based on Historical Ratios of Company and Peers
DO | NE | ATW | RIG | ESV | PDE | RDC | |
P/E | |||||||
Current | 8.02 | 6.01 | 8.06 | 7.23 | 10.56 | 26.9 | 11.54 |
Estimate | 10.63 | 9.24 | 10.56 | 7.37 | 7.40 | 13.12 | 8.02 |
Fair Value | $87 | $44 | $49 | $65 | $31 | $24 | $24 |
P/S | |||||||
Current | 2.6 | 2.5 | 3.1 | 1.9 | 3.6 | 3.7 | 2.0 |
Estimate | 3.5 | 3.3 | 3.4 | 2.6 | 2.9 | 2.2 | 1.5 |
Fair Value | $84 | $40 | $34 | $82 | $34 | $18 | $24 |
P/B | |||||||
Current | 2.46 | 1.17 | 1.48 | 1.58 | 1.18 | 1.20 | 1.03 |
Estimate | 2.37 | 1.53 | 1.59 | 1.68 | 1.19 | 1.00 | 1.00 |
Fair Value | $67 | $46 | $33 | $69 | $48 | $25 | $29 |
Avg FV | $79 | $43 | $39 | $72 | $37 | $23 | $26 |
Relative valuation based on historical ratios of the company and S&P 500
In this analysis, P/E ratios of the 7 companies were compared to the P/E ratios of the S&P 500 index. Based on historic averages, multiples were generated for the analyzed companies using the S&P 500 index as a base.
RV Based on Historical Ratios of Company and S&P 500
DO | NE | ATW | RIG | ESV | PDE | RDC | |
(P/E) / (P/E : S&P 500) | |||||||
Current | 0.42 | 0.31 | 0.42 | 0..38 | 0.55 | 1.41 | 0.60 |
Estimate | 0.53 | 0.46 | 0.53 | 0.37 | 0.37 | 0.66 | 0.40 |
Fair Value | $70 | $36 | $39 | $53 | $25 | $20 | $20 |
Summary:
Taking the average of the fair values obtained from the previous sections, fair value for the 7 companies is calculated. The results are shown in the table that follows.
Fair Value Estimate Based on RV
DO | NE | ATW | RIG | ESV | PDE | RDC | |
Company Only | $89 | $50 | $43 | $83 | $44 | $24 | $29 |
Company and Peers | $79 | $43 | $39 | $72 | $37 | $23 | $26 |
Company and S&P 500 | $70 | $36 | $39 | $53 | $25 | $20 | $20 |
Fair Value | $79 | $43 | $40 | $70 | $37 | $22 | $25 |
Current Stock Price | $69 | $35 | $31 | $65 | $45 | $30 | $30 |
Based on the performed analysis, Diamond Offshore, Noble Corporation and Atwood Oceanics appear to be undervalued, Transocean is fairly valued, while Ensco, Pride International and Rowan Companies are currently overvalued.
Disclosure: Long DO
